When it comes to buying or selling a business in Canada, there’s more to think about than just getting a good price. You also need to know how GST/HST (Goods and Services Tax/Harmonized Sales Tax) applies to the sale. If you’re not careful, GST/HST on sale of a business can lead to extra costs, or even penalties, for both the buyer and the seller. This guide will walk you through the GST/HST rules and how to handle them.
Table of Contents
- Understanding GST/HST on Sale of a Business
- Asset Sale vs. Share Sale: Different Rules for GST/HST
- How to Make a GST/HST Election to Save on Taxes
- When GST/HST Does Apply: Key Scenarios
- Step-by-Step: Calculating GST/HST on Sale of a Business
- GST/HST Filing and Payment After the Sale
- Common Questions About GST/HST on Business Sales
- Conclusion
Understanding GST/HST on Sale of a Business
What is GST/HST?
In Canada, the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) are taxes on most goods and services, including many business sales. The rules differ depending on the location of the business since each province can choose whether to have only GST or to use HST. Generally, the seller collects this tax and then sends it to the government.
Why GST/HST Matters in Business Sales
GST/HST can change the total cost of a business sale and affect both the buyer and seller. This tax can apply differently depending on whether a business is sold as assets (like equipment or inventory) or as shares of a company. This is why understanding GST/HST rules for business sales is critical.
Asset Sale vs. Share Sale: Different Rules for GST/HST
In Canada, businesses are usually sold in one of two ways: asset sales or share sales. Each has different GST/HST rules.
What Is an Asset Sale?
In an asset sale, only certain parts of the business are sold, like inventory, equipment, or land. The buyer gets to pick which assets they want, while the seller keeps the rest.
- GST/HST in Asset Sales:
When a business is sold as assets, the GST/HST usually applies to each item. For example, if you buy equipment or furniture, those purchases might have GST/HST. However, some special rules can reduce or remove GST/HST, especially if you’re buying the whole business.
What Is a Share Sale?
In a share sale, the buyer takes over shares of the company, meaning they’re buying ownership in the entire business rather than specific assets.
- GST/HST in Share Sales:
GST/HST generally does not apply in share sales. This is because shares are considered “financial services,” and financial services are exempt from GST/HST.
Tip: Because GST/HST applies differently to asset sales and share sales, it’s essential to know which type of sale is happening to calculate taxes correctly.
How to Make a GST/HST Election to Save on Taxes
If a buyer is purchasing all or almost all of a business’s assets, the GST/HST rules have a helpful tax-saving option. This option, called a GST/HST election, lets the buyer and seller agree to treat the sale as GST/HST-free.
What Is a GST/HST Election?
A GST/HST election is a choice that both the buyer and seller make together to avoid paying GST/HST on a complete business sale. This election is covered by Section 167 of Canada’s tax rules.
Section 167 Election: The Details
When using a Section 167 election, both the buyer and the seller agree that GST/HST does not apply to the sale. However, there are some important conditions:
- The buyer has to buy all, or nearly all, of the business’s assets—enough to keep running the business.
- The buyer must continue the same type of business with the assets they bought.
- Both parties need to complete Form GST44 to make the election official.
Benefits for Buyers and Sellers
Using a GST/HST election can make the sale simpler and save money for both sides. The buyer doesn’t need to pay GST/HST upfront, and the seller doesn’t have to collect or remit it.
When GST/HST Does Apply: Key Scenarios
In some cases, GST/HST does apply to a sale of a business. Here are some common situations where GST/HST might be charged:
Inventory and Equipment Sales
When only specific assets, like inventory or equipment, are sold, GST/HST usually applies. The seller will need to charge GST/HST on these assets, and the buyer will have to pay it.
Mixed Sales
Sometimes, only part of the business is sold, which may include a mix of taxable and non-taxable items. In this case, GST/HST applies only to the taxable assets, not to exempt or zero-rated ones.
Exempt Goods and Services
Certain goods and services are exempt from GST/HST. For example, real property (like land or a building) could have different rules. It’s always wise to check if specific assets qualify for exemptions before the sale.
Step-by-Step: Calculating GST/HST on Sale of a Business
Calculating GST/HST can vary depending on the province where the business is located since each province may have a different rate.
GST/HST Rates Across Provinces
In provinces like Alberta, only GST at 5% applies. However, in provinces with HST (like Ontario, at 13%), the combined GST/HST rate applies. Check the applicable rates by province here.
Examples of GST/HST Calculations
Here’s a simple example of calculating GST/HST on business assets:
- Example: If you’re buying equipment valued at $50,000 in Ontario (13% HST), the GST/HST would be $6,500.
- Total Cost = $50,000 + $6,500 = $56,500
GST/HST Filing and Payment After the Sale
Once the sale is complete, both the buyer and the seller have some responsibilities related to GST/HST.
Who’s Responsible for Paying GST/HST?
Typically, the seller collects the GST/HST from the buyer and remits it to the government. However, if an election was made (as in a Section 167 election), GST/HST may not need to be collected.
Filing Requirements
The seller needs to report the GST/HST on their tax filings and ensure they’ve collected and sent the correct amount to the government. The buyer, on the other hand, should keep detailed records, especially if they plan to claim input tax credits (ITCs) on the GST/HST paid.
Penalties for Non-Compliance
If the seller fails to collect or remit GST/HST, they could face penalties. Keeping accurate records and filing on time is essential to avoid fines or interest charges.
Common Questions About GST/HST on Sale of a Business
Does GST apply to all business sales?
No, GST/HST does not apply to share sales but usually applies to asset sales unless a Section 167 election is made.
Are there ways to reduce GST/HST on my business sale?
Yes, making a Section 167 election can help reduce or eliminate GST/HST in some business sales.
What happens if I don’t pay GST/HST?
Failing to pay or remit GST/HST can result in penalties, interest charges, and other complications.
Conclusion
Understanding GST/HST rules in business sales is essential for avoiding extra costs and staying compliant with tax regulations. Both buyers and sellers benefit from knowing when GST/HST applies, how to make a GST/HST election, and what to do after the sale to ensure tax filings are accurate.
For that reason, when buying or selling a business, always involve a competent M&A lawyer and accountant who understands business sale and purchase transactions, and can guide you through a smooth legal and tax efficient transaction.
For help navigating these rules, it’s best to talk to a tax advisor on our team who understands Canadian business sales and GST/HST implications. Reach out to us using this link or at info@thinkaccounting.ca.